Every business at some point or another will likely need additional funding. You might be looking for capital to expand to new regions or maybe you just need help making payroll temporarily. Relax, because there are several options available – and one of them is likely right for you.

Some typical capital sources are: traditional lending (banks), alternative financing, equipment financing companies, and friends and family. We'll take a look at each and help you evaluate the differences.

Traditional Lending
A traditional bank loan is typically the first option people consider. Borrowing from a bank feels safer for some, but often because of a lack of awareness of other options. An average business today has only a 50 percent chance of being approved. To qualify, you will need to provide extensive paperwork (including tax returns and profit and loss statements), to have been in business for at least three years, and to have excellent credit. You'll most likely be required to furnish personal collateral as well. While interest rates will be better, the time it takes to secure capital becomes an issue for many. Companies that need the money quickly will want to consider other options. Additionally, a lower interest rate but longer repayment period on a traditional loan puts the overall cost about the same, if not more.

Alternative Financing
In contrast, alternative financing options, which may have higher interest rates, also have shorter payback periods and often give discounts if the amount is paid back more quickly. You can typically get approved for this type of loan with four months of bank statements, an application, and no personal collateral. If approved, alternative-lending sources can usually provide funds in as little as three days. So if quick turn on the deal is imperative, this is a strong contender for your best option. Your credit score, your business's credit score, how long you've been in business, and your average monthly deposits will determine the terms of the deal.

That said, the term "alternative financing sources" has a variety of meanings. Many alternative lenders offer an array of products. It's important to understand the differences and be wise about what you're getting into. The options available include: merchant cash advance, total revenue advance, and fixed payment product.

A merchant cash advance is based on merchant credit card sales and is a great option if your business does more credit cards sales than cash. The lender will front the money, and then take a percentage of your upcoming batched credit card sales until it is fully repaid. The benefit is that each repayment amount reflects the current level of business income rather than a fixed amount. This is an excellent low-risk option, particularly for those in a business with a seasonal sales flow.

A total revenue advance is calculated on total sales rather than credit card sales alone. The money is still supplied up front and paid back as a percentage of total income, but is drawn directly from your bank account. This is another great low-risk option in that it is also reflective of daily sales rather than holding a predetermined payment amount.

Lastly, you can opt for fixed payments with a small business loan. The benefit of a fixed loan is that it will be paid off within a predetermined amount of time. If your business remains consistently steady, this can be a good choice.

Even when borrowing money from friends and family, it is advised to have a legal contract that details the specific terms agreed upon.

 

Equipment is typically financed with a 60-month term and a lower interest rate than an unsecured loan since the equipment serves as collateral. Equipment manufacturers often have relationships with financing companies that can help speed up the approval process.

According to the author, an average business today has only a 50 percent chance of being approved for a traditional bank loan.

Equipment Financing
Equipment financing companies are a fantastic option if you're seeking capital specifically for the purpose of purchasing hard goods or machinery. Typically this option has a standard term of 60 months and would have a slightly lower interest rate than an unsecured loan, since the equipment itself serves as collateral. Also, manufacturers often have relationships with financers that may help move approval along quickly.

Friends and Family
The final option to consider is friends and family. For those who may have a low credit score or no available collateral, this may be a way to gain sizable amount of capital. Word to the wise: if you do choose this option, do not skip the legal contract. Be absolutely sure the terms are understood, in spite of any personal relationship with the lender. The most difficult aspect of borrowing in this way is often simply approaching people you know well to ask for money.

As an alternative to traditional lending, a merchant cash advance is based on your credit card sales, which the lender takes a percentage of, until the loan and interest is fully repaid. In this arrangement, each repayment amount reflects the current level of business income rather than a fixed amount.

A total revenue advance is another alternative funding option that is also reflective of daily sales instead of requiring a predetermined payment amount. Payments are a percentage of total income rather than credit card sales alone, and are drawn directly from your bank account.

Christopher Gravagna is the co-founder and CMO of GoAccredited Business Solutions, which offers working capital and business loans to small to medium-sized businesses. The company represents an alternative to traditional bank loans and states it can fund businesses within a few days.
goaccredited.com

Due Dillegence
There are a few important things to consider when choosing a lender. No matter which option you select, find out if they have experience lending in your industry. Check the Better Business Bureau. Ask about their lender relationships. Will they share customer testimonials? How long have they been in business? In both types of lenders, transparency is the attribute you want. Be clear on exactly how the entire process will work, where the funds come from, how it will be paid back and when. Understand any fees involved. Red flags are unanswered questions or ambiguous responses.

Understanding the terms of your financing is the last step. The best way to comprehend the deal you're making is to ask smart questions – lots of them. Make sure you completely understand the direct cost of the capital you're securing, including interest rates, fees, penalties for late or early payment, balloon buyouts on equipment, etc. If anything isn't 100 percent clear to you, ask again.

Acquiring financing for your company can be an intimidating process. The key to making the right financing option decision is understanding your own business profile as well as what opportunities are out there – then you can determine the best match. You want a lender who has experience in your industry, is rated well by the BBB, meets the time frame that works for you, and offers a repayment plan that realistically matches your income. While bank loans are right for some businesses, alternative financing is an expanding industry that gets many businesses funded, quicker, and often with less paperwork and less risk. Overall, you need to do the proper research, ask a lot of questions, and completely understand how this money will benefit your business.